Thinking about a start-up? More and more enterprising scientists are applying their knowledge of technology and industry to their own new businesses. What does it take to shape one’s vision into a sustainable business? A solid business plan is obviously important. However, even before that, you must figure out which type of business entity will best suit your needs. This decision will affect everything from the amount of taxes and paperwork you’ll face to your personal liability to the bottom line. Here are the major options you have, along with their advantages and drawbacks.

Sole proprietorship: Someone who owns an unincorporated business by himself or herself. The main advantage is ease of formation. To get started, you need only perform a simple filing with a County Clerk’s office. The tax implications and reporting requirements are straightforward, involving taxation at individual tax rates and standard IRS Schedule C filing. There is no separate entity tax.

However, as your own boss, you are the sole risk manager and the profit/loss center—for better or worse. Your liability is unlimited, but you may have restricted sources of capital and funding.

General partnership: An association of two or more people who co-own a business for profit. These partnerships are generally easy to form at the state and county levels. Partners agree how to share profits and losses, which flow through the partnership to each partner’s individual tax return via a form K-1. General partnerships are typically not subject to federal or state business entity taxes. The general partners, however, are jointly liable for the obligations of the entity.

Limited partnership: One or more limited partners and at least one general one. Limited partners cannot be active in the business management; if they are, they risk losing their “limited” status.

Limited and general partnerships are similar in areas of taxation and what is referred to as “special allocation of income and loss.” Government fees for partnership formation may be higher for a limited partnership than for a general one, however. State regulations may require notices about the partnership formation to be published.

C-Corporations are your large business “Inc’s.” Corporate business entities provide greater segregation between their owners and the entity itself than is provided for in partnership arrangements.

Taxation issues are comprehensively addressed by the IRS, under subchapter “C” of the Internal Revenue Code. C Corporations require corporate officers and directors whose identities must periodically be reported to the state.

On the plus side, a C Corporation is taxed for income purposes as a separate corporate entity at both the federal and state levels. In addition, the number and types of shareholders are unrestricted. Shareholders have limited financial liability even if they participate in corporate management; rather, the corporate entity becomes the liable party. In a C Corporation, the retained corporate earnings can be kept in the business.

On the other hand, C Corporations are subject to double taxation; corporate income is taxed at the corporate level, while dividends are taxed at the individual (shareholder) level. The formal requirements of a C Corporation include government formation fees, significant record- and book-keeping, shareholder meetings and corporate elections, the issuance of stock certificates, and the sale of stock for raising capital. Financial losses are only deductible at the corporate level.

S Corporation: A small business entity that makes a valid election with the IRS to be taxed differently than a C Corporation. S Corporations generally pay no corporate income taxes on their profits. Instead, shareholders pay income taxes on their proportionate shares of the corporate profits. Thus, an S Corporation is considered a pass-through entity similar to a partnership, but shareholders enjoy the limited liability of a corporate structure.

Among the limitations: These entities must be domestic corporations organized under state law, and shareholders are limited to fewer than 100 and to certain entities such as individuals, estates and trusts. All individual shareholders must be citizens or residents of the United States. Unlike a C Corporation, an S Corporation cannot have retained earnings.

Limited liability companies, or LLCs, are formed by filing Articles of Organization with a state’s secretary of state. The IRS taxes LLCs as if they were partnership entities. There are no restrictions on the number or types of owners or the extent of owner participation in management. An LLC will be dissolved when certain events occur; for example, bankruptcy, the death of a member, or the incapacity or withdrawal of any member unless otherwise voted upon. Annual filing fees are required.

Bill Greener is a U.S. registered patent attorney who practices in Ithaca, N.Y. and is a partner in the firm of Bond, Schoeneck & King, PLLC. This blog post is based on an article that appeared in the May 2007 issue ofOptics & Photonics News.